Helmerich & Payne, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2018, ended June 30, 2018. Comparisons are with the corresponding 2017 periods unless stated otherwise. The company provides contract drilling services through U.S. Land, Offshore and International Land segments, with additional technology and other businesses.
Financial performance and position
- Third-quarter revenue: $648.9 million, up from $498.6 million. U.S. Land revenue was $536.6 million; Offshore was $37.7 million; International Land was $63.3 million.
- Third-quarter earnings: Continuing-operations loss was $8.2 million, or $0.08 per diluted share, versus a $23.1 million loss, or $0.22 per diluted share. Net loss was $8.0 million.
- First nine months: Revenue was $1.790 billion versus $1.272 billion. Continuing-operations income was $490.8 million and net income was $480.2 million, compared with continuing-operations and net losses of $106.2 million and $105.7 million, respectively, in 2017. Fiscal 2018 results include a $491.4 million net tax benefit related primarily to U.S. tax-law changes; reported earnings are therefore not a straightforward measure of operating improvement.
- Operating trends: U.S. Land segment operating income improved to $34.3 million in the quarter from a $8.0 million loss. U.S. Land utilization rose to 63% from 52%, and average rig margin per day increased to $8,764 from $7,730. Offshore segment income fell to $3.8 million from $6.5 million, mainly as expenses per day increased. International Land income was $4.3 million versus $4.9 million.
- Cash flow and investment: Nine-month operating cash flow was $358.4 million, compared with $240.3 million. Capital expenditures were $322.7 million, versus $300.3 million; operating cash flow less capital expenditures was approximately $35.8 million. Investing activities used $342.2 million, including $47.9 million for the MagVAR acquisition. Dividends paid were $230.4 million.
- Liquidity: Cash and cash equivalents were $306.4 million at June 30, down from $521.4 million at September 30, 2017; short-term investments were $44.3 million. Current assets were $1.133 billion and current liabilities $381.7 million.
- Debt: Long-term debt had a $500 million principal balance and $493.7 million carrying value; the 4.65% senior notes mature in March 2025. The company had no revolver borrowings and $260.7 million available under its $300 million facility after letters of credit. It reported covenant compliance.
- Margins and other metrics: Consolidated operating income was $6.2 million for the quarter and $8.5 million for the nine months. Dividends declared were $0.71 per share for the quarter and $2.11 for the nine months.
Material changes and developments
- Higher activity drove revenue growth, particularly in U.S. Land: quarterly revenue days rose to 19,917 from 16,577, with average working rigs increasing to 218.9 from 182.2. Management attributed higher activity primarily to improved commodity prices.
- Quarterly operating costs increased with activity; U.S. Land expense per day also rose, reflecting wage increases and higher pass-through and one-time costs. Offshore costs per day rose substantially because of rig start-up and workers’ compensation insurance adjustments.
- At June 30, 224 of 350 U.S. Land rigs were contracted: 136 on fixed-term contracts and 88 in the spot market. Total drilling backlog was $1.2 billion, down from $1.3 billion at September 30, 2017; approximately 77% was not expected to be filled in fiscal 2018.
- The company acquired MagVAR in December 2017 for approximately $47.9 million net of closing adjustments. For the nine months, MagVAR contributed $7.5 million revenue and a $2.0 million net loss.
- Deferred income taxes declined to $833.7 million from $1.333 billion, primarily reflecting the tax-law remeasurement. The nine-month income tax benefit was $494.0 million; management noted provisional tax accounting and continuing work to finalize certain effects.
Outlook, risks and contingencies
- Management estimated fiscal 2018 capital spending at approximately $450 million, subject to maintenance needs and market-driven projects. The board approved approximately $100 million for long-lead items, including conversion of seven U.S. Land FlexRig4 rigs to FlexRig3s, primarily during fiscal 2019.
- Based on notices received, approximately $1.8 million of early-termination revenue was expected in the fourth fiscal quarter. Backlog and early-termination payments are uncertain: customers may terminate contracts, and payments may not be due in some circumstances.
- Key risks include oil and gas price and activity volatility, customer concentration, contract termination and collection risk, operating and safety events, equipment availability, and foreign political, economic, currency and repatriation risks. About 10% of nine-month revenue came from international contract drilling; approximately 96% of that international revenue came from South America. Argentina was identified as highly inflationary, and the company reported $2.5 million of foreign-currency losses for the nine months.
- The company continues to seek damages over Venezuela’s 2010 seizure of 11 rigs and related property; timing, amount and likelihood of recovery cannot be determined, and no gain was recognized. The Department of the Interior’s consideration of a previously disclosed offshore testing matter had no assured outcome, though the company did not anticipate further action.
- Management stated fiscal-year spending and other cash requirements were expected to be funded through cash and operating cash flow, with the revolver or debt markets available if needed; it cautioned that future operating cash flow is not assured.
Important facts for investors to verify
- How much of the $480.2 million nine-month net income reflects the tax benefit, and what the company’s normalized earnings and tax rate may be.
- Whether improving U.S. Land utilization and rig margins persist, and how operating costs and offshore performance evolve.
- Backlog conversion, contract renewals and termination exposure, including whether the expected fourth-quarter termination revenue is realized.
- Actual capital spending and the costs, timing and returns of the planned rig conversions and fleet upgrades.
- Cash generation after capital expenditures and dividends, and continued access to the revolver while maintaining debt-covenant compliance.
- Developments in the Venezuela recovery claim, Argentina currency and repatriation conditions, and other international legal or political exposures.